One of the greatest aspects of putting your money to work on Wall Street is that there isn't a one-size-fits-all strategy to wealth creation. Regardless of your investment style or approach, there are always pathways to grow your nest egg.
However, there are certain investing strategies that are tough to top. One such strategy that's been a consistent winner for patient investors is buying dividend stocks.
A recent study from Ned Davis Research and the Hartford Funds examined the performance of dividend-paying companies to non-payers over a roughly half-century stretch (1973-2022). What this analysis showed was that dividend payers generated an annualized return of 9.18% over five decades. By comparison, the non-payers scraped and clawed their way to an annualized return of just 3.95% over the same timeline.
Though the magnitude of this outperformance might be surprising, the fact that dividend payers have run circles around non-payers shouldn't come as a shock. Companies that pay a regular dividend are typically profitable on a recurring basis, time-tested, and capable of providing transparent long-term growth outlooks. They're precisely the type of businesses you'd expect to increase in value over long periods.
Image source: Getty Images.
Although not all dividend stocks are created equally -- high-yield income stocks can sometimes be more trouble than they're worth -- proper vetting can uncover some true gems with jaw-dropping yields that'll pad your pocketbook on a monthly basis.
If you want to generate $100 in super safe monthly dividend income in the new year, simply invest $11,925 (split equally, three ways) into the following three high-yield stocks, which are averaging a 10.07% yield!
Realty Income: 5.36% yield
The first high-octane income stock that can help deliver $100 each month in 2024 is none other than retail real estate investment trust (REIT) Realty Income (O 0.31%). Realty Income has increased its distribution in each of the past 104 quarters (a period spanning 26 years).
Realty Income endured a challenging campaign in 2023, with higher Treasury bond yields and concerns about a potential U.S. recession weighing on most REITs. Since consumers usually pare back their spending during recessions, there was clear angst toward anything having to do with the retail industry.
NYSE: O
Key Data Points
However, Realty Income has demonstrated for roughly three decades that it's anything but ordinary.
One of the factors that makes Realty Income special is its vast commercial real estate (CRE) portfolio. Approximately 91% of total rent spanning its greater than 13,200-property portfolio is derived from businesses that are resilient to economic downturns. This includes grocery stores, convenience stores, dollar stores, drug stores, and general merchandise stores, which collectively account for about 39% of the company's annualized contractual rent. These are stores that cater to basic-need goods and services in any economic climate.
In addition to focusing on recession-resilient industries, Realty Income has been steadily diversifying its CRE portfolio. It's engineered two deals over the past two years that have allowed it to enter the casino industry. It's also in the process of acquiring Spirit Realty Capital in an all-share deal that clocks in at $9.3 billion. Spirit Realty's CRE portfolio will complement Realty Income's existing assets, while allowing the combined company to further diversify beyond retail.
History offers comfort for investors, as well. Although past performance is no guarantee of future results, Realty Income has grown its earnings per share in all but one of the past 27 years. In other words, Realty Income has a lengthy track record of making smart decisions.
Lastly, Realty Income is historically inexpensive. It's currently valued at a multiple of 13.4 times forecast cash flow in 2024, which represents at least a decade low.
NYSE: PFLT
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PennantPark Floating Rate Capital: 10.17% yield
A second high-yield stock capable of producing $100 in super safe monthly dividend income in 2024 from an initial investment of $11,925 (split three ways) is business development company (BDC) PennantPark Floating Rate Capital (PFLT 0.73%). This predominantly under-the-radar BDC increased its monthly payout twice in 2023.
BDCs are businesses that invest in small- and micro-cap companies (collectively known as "middle-market companies"). BDCs can invest in the debt of middle-market companies, purchase common and/or preferred stock in these businesses, or tackle some combination of the two. In the case of PennantPark, its pendulum most definitely swings toward a focus on debt securities.
As of Sept. 30, PennantPark held $906.3 million in debt from middle-market businesses. Since most small- and micro-cap companies are unproven, they often lack broad-based access to traditional debt and credit markets. When these smaller businesses are able to land financing deals, it's usually at high interest rates. PennantPark's weighted average yield on debt investments clocked in at a cool 12.6%, as of the end of September.
Another aspect of PennantPark's debt-securities portfolio that's critical to the company's success is that 100% of the loans it holds are variable rate. Since March 2022, the Federal Reserve has raised its federal funds target rate by 525 basis points. In return, PennantPark's weighted average yield on debt investments has surged by 520 basis points to the noted 12.6% over the trailing two years.
To add to the above, all but $0.1 million of its $906.3 million in debt securities is first-lien secured. If one of the company's borrowers were to seek bankruptcy protection, first-lien secured debtholders are first in line for repayment. It should be noted that just 0.9% of the company's portfolio (relative to its cost basis) was non-accrual (i.e., delinquent), as of Sept. 30. This is a testament to the exceptional vetting of the company's loan/investment team.
Image source: Getty Images.
AGNC Investment: 14.68% yield
The third high-yield stock that's capable of generating $100 in super safe monthly dividend income in 2024 from a starting investment of $11,925 (split equally in thirds) is mortgage REIT AGNC Investment (AGNC 1.65%). Although most stocks can't sustain a 15% yield, AGNC has averaged a double-digit yield in 13 of the past 14 years.
Without getting overly complicated, mortgage REITs aim to borrow money at short-term lending rates and use this capital to purchase long-term assets with higher yields, such as mortgage-backed securities (MBSs). The goal for mortgage REITs is to widen their net interest margin, which is the average yield on the assets they own less their average borrowing rate.
Last year was, arguably, the most challenging on record for the mortgage REIT industry. The Fed's aggressive rate-hiking cycle sent short-term borrowing costs soaring, which ultimately shrank the net interest margin for all mortgage REITs.
NASDAQ: AGNC
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But there is good news on the horizon for AGNC and its peers. The Federal Reserve has tentatively penciled in three interest rate cuts for the new year. Mortgage REITs historically perform their best during rate-easing cycles.
The biggest catalyst in 2024 would be an end to what's currently the second-longest yield-curve inversion in history. Normally, longer-dated Treasury bonds have higher yields than Treasury bills set to mature in a matter of months. But for much of 2023, the yield on the three-month T-bill trounced the yield on the 10-year T-bond. Should the yield curve normalize in 2024, AGNC's net interest margin would be primed for expansion.
Something else to consider about AGNC Investment is that it predominantly puts its money to work in agency securities. An "agency" asset is backed by the federal government in the event of default. Though this added protection does reduce the yield AGNC nets on its MBSs, it importantly allows the company to deploy leverage to boost its profit potential.
Look for 2024 to be a bounce-back year for AGNC and the mortgage REIT industry.
